A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Friday, November 7, 2008

The 100 Year Clearing

Let's start with this article. In it, Hugo Salinas Price points us to an observation he makes that he hasn't seen mentioned anywhere else. And that is the sudden decline in the non-gold reserves held by the Central Banks of the world.

He concludes the article with this question:

What is the significance of the drastic change in the growth-trend of International Reserves, from explosive growth, to the sudden beginning of a contraction?

I hope others, more competent than myself, address this question. I believe it is quite important that we have an authoritative answer to it.

I certainly don't consider myself more competent than Mr. Price, nevertheless I will take a shot at addressing his question with a little help from the most perspicacious A.E. Fekete.

First, let's take a look at the graph in Price's article because it is a little misleading:

If you notice the first 80% of the graph goes parabolic, then it levels off for the last 20% with a slight decline. What is misleading is the x-axis of time. The first 80% covers 60 years of time, and the last 20% covers only 3 months of time. So in reality, if we were to compress that last 20% so that it matched the time progression it is not a leveling off at all, it is the very beginning of a sharp decline.

This is important to understand because any parabolic function like this cannot be maintained for very long. What goes straight up, must come down very quickly. A good example of this kind of parabolic rise and subsequent crash is this chart of the price of gold, which peaked in 1980:

So the question is, what is going on with the Central Bank "paper" reserves? To find the answer, I turn to some history and theory from Antal E. Fekete. On Monday, he spoke to the Civil Society Institute at Santa Clara University in California. In his address I found a thought that leads me to what may be happening with the decreasing Central Bank reserves. You can read Fekete's paper here.

The issue I am focused on is the clearing mechanism of the entire world's economy. A smaller, fractal example of this is a clearing house for stock market trades. By the end of each day, all buy and sell orders are cleared either internally or through a trade on the floor of the exchange. There is a time limit to the clearing mechanism. It must be done each day. The orders fly around all day, but by the end of the day the net of all the orders must be settled, or cleared. And once this is done, the bills, or orders just disappear because each party has received his net of money and/or stock. You could say that these orders to buy or sell throughout the day were "self-liquidating" by the end of the day.

Fekete takes us back to the Middle Ages with a fine example of self-liquidating credit, clearing, and final settlement:

A ‘fairy’ tale

Let us look at another historical instance of clearing that was vitally important in the Middle Ages: the institution of city fairs. The most notable ones were the annual fairs of Lyon in France, and Seville in Spain. They lasted up to a month and attracted fair-goers from places as far as 500 miles away. People brought their merchandise to sell, and a shopping list of merchandise to buy. One thing they did not bring was gold coins. They hoped to pay for their purchases with the proceeds of their sales. This presented the problem that one had to sell before one could buy, but the amount of gold coins available at the fair was far smaller than the amount of merchandise to sell. Fairs would have been a total failure but for the institution of clearing. Buying one merchandise while, or even before, selling another could be consummated perfectly well without the physical mediation of the gold coin. Naturally, gold was needed to finalize the deals at the end of the fair, but only to the extent of the difference between the amount of purchases and sales. In the meantime, purchases and sales were made through the use of scrip money issued by the clearing house to fair-goers when they registered their merchandise upon arrival.

Those who would call scrip money “credit created out of nothing” were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit.

You see the clearing mechanism, the scrip money, figured the final settlement of gold. At "the end of the day", the trades were netted out and those who were owed received a final payment of gold. I say this payment was final because it didn't require the future performance of any counterparty. You took your gold home and you were done.

But what's important, is that all debts were cleared on a regular time basis. Fekete also talks about the Real Bills Doctrine in which debts are cleared within 91 days of creation. This time restraint is based on the length of a season, because that is a sufficient amount of time for seasonal products to get from a producer to a final user. The Real Bills Doctrine originates with Adam Smith.

Thousands of years ago, all debt was cleared every 7 years through debt forgiveness. This worked because it was known by everyone and was therefore figured into the lending practices of the day. Christopher Laird of the Prudent Squirrel put it well in his latest excellent article:

The second thing that might get the world out of this impending economic depression and a collapse of the USD later would be to forgive all debts. Possibly that would wipe out the USD too anyway. But that would set the stage for a huge world economic recovery.

The trouble with debt forgiveness is it never seems to happen. Believe me, I am not talking hogwash about debt forgiveness. The Bible, for example, talks about how every 7 years and every 70 years there is to be total debt forgiveness. It’s called the Jubilee. The idea is a legitimate concept that can work and has worked.

You don’t think that’s viable? Well it can work because all that happens is that the lenders who offer credit have to factor in either payment in full or forgiveness over a 7 year period. This can be done and would actually result in the biggest sustained world economic boom ever imagined.

Perhaps this is where we get our 7 year bankruptcy laws?

Fekete goes on to explain how this periodic clearing mechanism was surreptitiously eliminated by the passage of legal tender laws in France and Germany in 1909. This was done in preparation for WWI, but what it also did was to set in motion a sea change in which debt was now required by law to be settled in non-self-liquidating bills issued by governments, rather than the self-liquidating bills previously issued by private banks which were periodically cleared by a settlement in gold.

So now, because these government bills did not disappear upon the final consumer paying for the final product in gold coins, they would start to accumulate. This was a slow process that happened over many years. People would not notice a difference right away because gold coins still circulated in the system.

But on the largest scale, the worldwide scale, these legal tender bills began to pile up, or accumulate as the final settlement of any net national trade deficit or surplus. In our modern world this happens as a Chinese exporter is paid in US dollars for his shipment of goods sent to the US. Then he takes those dollars to his local bank and trades them in for his local currency. The bank then trades those US dollars with the Chinese Central Bank for freshly printed currency and the Central Bank uses those dollars to buy US Treasury bills to hold in reserve. The Treasury bills are preferred because they pay interest.

Up through the 1960's this was accepted by the world because it was thought that this debt could be cleared at any time through the final settlement of gold from the US Treasury. But in the late 60's, the French tried to clear their accounts and take final payment and the "gold window" was promptly closed.

Ever since then, the world has somewhat reluctantly accepted the continuation of this system because they could still use the dollars to buy cheap oil and gold on the open market, even if there wasn't an official clearing mechanism any more.

But as you can see from Price's graph, their holdings of our paper debt products has greatly exceeded their need to spend it, and has gone parabolic, an unsustainable rise.

So now, 100 years after legal tender laws eliminated the periodic clearing mechanism at the smallest scale, the fractal pattern of debt has grown to it breaking point on the largest scale. We have arrived at the forced clearing of debt on a worldwide scale. And because there is no official clearing mechanism, this will happen on the open market.

Of course it is a little more complicated than that. For one thing, the ultimate debtor/purchaser, the American consumer, has run out of "scrip money". Imagine if Fekete's Medieval Fair went on for a really long time without it's daily clearing function. As time went by, the paper scrip money would pile up with the sellers, and the buyers would be going farther and farther into debt, until finally the fair would stop issuing new scrip money to the buyers, and the sellers would demand a clearing, a final settlement.

That is what is happening right now on a worldwide scale. The creditors are forcing the clearing of the debt. This is probably intentional, though it could easily be a natural response to that parabolic rise in reserves. From 1909 through 2000, the US debt rose to $1 Trillion. Then from 2000 to 2008 it rose from $1 Trillion to $10 Trillion. That is a parabolic rise that directly matches the rise of reserves in the world's Central Banks.

And because this debt must now be cleared on the open market, the only outcome that I can possibly see is a world where FreeGold prevails. This debt will be cleared by the purchase of "real things", of which gold is a major component. I'll end with a quote from FOA which speaks about the "world's massive trade settlement":

During the events directly before us, any and all contracts will be swept along on this raging river of economic turmoil. Be they contracts for, gold, currencies, bonds, stocks or commerce, all of them will lose credibility as the worlds massive trade settlements shifts from one medium to the next....when the armies invade they grab the rare coins, art work and gold. Forget the currency!

"The Federal Reserve will do what it takes to maintain its credibility [...] Fisher said the US dollar is a "faith-based currency" dependent on the credibility of a central bank.

"In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity..."

FAITH-BASED CURRENCY!

Question: Do you think there is anything they can do that will increase people's faith?

Our entire worldwide monetary structure is a giant confidence game. Clandestine manipulation only works so long as the people's confidence in the system remains. That is, confidence that there is no manipulation and that the effects of the manipulation are seen as normal market forces.

I believe that the Fed/JP Morgan have clearly reached the point of diminishing returns on their surreptitious activities. The "confidence game" is now being exposed in my opinion. Karl Denninger lays it out pretty well in his blog today. What the Fed/JP Morgan are doing right now is essentially "kiting". That is not a sustainable game.

You were reading FOA back when he was writing in 2000-2001, correct? Do you believe that Another and FOA had some inside information into the actual thoughts of the Euro architects? How about inside information into the thoughts of the Saudis?

International Charlemagne Prize of Aachen for 2002Acceptance speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002http://www.ecb.eu/press/key/date/2002/html/sp020509.en.htmlSNIPThe euro, probably more than any other currency, represents the MUTUAL CONFIDENCE at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.

Prior to the publication of Keynes’ book, “The General Theory of Employment, Interest and Money" in 1936, people held the belief that monetary policy was a potent instrument for promoting economic stability. With Keynes, the belief shifted almost to the opposite extreme that “money does not matter” Keynes’ alternative provided both an appealing justification and a prescription for extensive government intervention. (Milton and Rose Friedman, Free to Choose, New York and London, Harcourt Brace Jovanovich, 1980, p. 70-71)

The 15 November 2008 G20 summit in Washington seems to be thinking about reviving Keynesianism. Keynes would have presented the solutions we need for the present crisis.

Now they see the benefits of the eurozoneBy Wolfgang MünchauPublished: November 2 2008 17:50 | Last updated: November 2 2008 17:50http://www.ft.com/cms/s/0/214a8c82-a8e4-11dd-a19a-000077b07658.htmlOne of the lessons from Iceland’s and Hungary’s fiasco is that non-eurozone Europe may not be economically viable during times of crisis. Several countries are financially overextended but even those that are not, such as Poland, may be caught in the maelstrom.

FORWARD with my dirty reading notes.It's the form, not the content, of these notes which is dirty,.

Banks used to be empowered to issue banknotes for the gold they had in reserve.Innovative or fraudulent entrepreneurs then issued more notes than they had gold in stock.Central banks then arrogated (to) themselves the right to issue banknotes.Banks were forced to collaborate with the central bank.

The essential economic policy advocated by Keynes is government budget deficits which are held to be necessary to prevent or combat mass employment. (1) \

Keynes’ entire system can be summarised in one sentence; A free market in labour and fall in wage rates is incapable of eliminating unemployment,; mass unemployment is an inescapable feature of a capitalist economic system in modern conditions (2)

Keynes’ ‘analysis’ rests on two pillars. The first, p. 680, being that savings become investments only through the terrible route of a decline in social income The second pillar is the thesis that money social income and level of employment are correlated and that the latter is a functions of the former. This second pillar assumes that a certain “full employment” level of social income exists below which there is correspondingly greater unemployment (3)

The nub of the Keynesian critique of the free market economy, then, rests on the involuntary unemployment allegedly caused by too low a level of social expenditures and income.(4)

The sum and substance of the “Keynesian Revolution’ was the thesis that there CAN be an unemployment equilibrium on the free market/ (5)

Whereas economists argue that purchasing power grows out of production (6) Keynes argued that general employment is always positively correlated with the aggregate demand for consumer goods (7)

Keynes was the leading advocate of the purchasing power doctrine and the leading opponent of the doctrine that supply creates its own demand. (8) He never recognised that progressive inflation was needed in order that any growth in monetary demand could lastingly increase the employment of labour. (9) but thought that one can spend one’s way out of recession by boosting government spending. (10)

Nobel prize laureate Friedrich von Hayek could occasionally discuss the crucial issues with Keynes. Hayek realized that Keynes was not a highly trained economist, that Keynes was not even centrally concerned with the development of economics as a science. Keynes was neither a full master of the body of economic theory then available nor did he really care to acquaint himself with it Keynes’ aim was to influence current policy and economic theory was for him simply a tool for this purpose., says Hayek (11)

The ROOT VIEW of the original Keynes plan was that The power of individual governments before World War II to control currency depreciation and exchange depreciation in countries following unsound currency and fiscal policies had proved utterly inadequate in every country except Hitler’s Germany.The idea arose that if the various governments would only cooperate in this matter,it would be possible for them collectively to do what they pleased with internal currency and finance and still keep stable exchange rates.they could prevent transactions which RECOGNISED currency depreciation in terms of gold or of exchange of other countries. Countries which had overexpanded credit could continue to easy money markets with safety. (12)

Ivo; Will they have ANY view in Washington this week?

One grave and fundamental ERROR is Keynes’ insistence to regard interest rates (13) Rate of interest is not, as Keynes thought, the price of money( 14)Instead, it is the price spreads between the stages of production.The former is only a reflection of the latter. But it requires no Keynesian labyrinths to explain this phenomenon (13, again)

(10)Gordon Brown and his cohorts go back to their Keynesian default settingBy Liam HalliganLast Updated: 12:33am BST 10/08/2008http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/10/ccliam110.xmlI hesitate to admit this, but one of my earliest memories is a political speech. I distinctly remember, as a pyjama-clad seven-year old, hearing the following words. "We used to think you could spend your way out of recession by boosting government spending. I tell you, in all candour, that option no longer exists. And in so far as it did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by higher unemployment as the next step…"Jim Callaghan on News at Ten 1976 Labour party conference.

I imagine it was very exciting for Keynes in his day to write down his theories and then watch them play out. It is most often the case that the thought that reaps instant gratification or power wins out over the one that is eternally sustainable. After all, life was only 60 years long back then.

If you were Hayek, you might have hoped that at some time in the next 60 years someone would fix the unavoidable consequences. Get off the track before the train arrives, so to speak.

Unfortunately we have embraced Keynes' flawed ideas to the bitter end. And now we will look to him for the answer to our problems? Un-_______-believable.

FOFOA

(Fortunately for some of us, I think the train is loaded with FreeGold!)

There are two parties. One believes that the powers that be have all the power, and to bet against them is futile. The other believes that reality takes hold on an unpublished time scale and then karma is delivered.

The old gold standard did not provide for the possibility that an increase of the ounces, kilograms, or tons of gold held in reserve by the bank administering the currency would lead to an increase in the currency’s value.

Hence, gold held in reserve by the bank administering the currency was not considered as a freely trading financial reserve thereby preventing that each increase in the price of gold and thus increase in the value of the gold reserves of the currency would bring about an increase in the value of the currency itself.

Currencies can however only remain competitive if their value is not a fixed quantity of gold but is dependent upon the amount and value of the gold their administering bank holds in reserve.

In that case, the more gold the administering bank has in reserve and the more the price of gold increases, the higher will be the value of the currency administered by the bank.

That’s FreeGold.

For the Saudis, this creates the problem that the value of the currency is then not intrinsic in the currency.

There is a Hadith of Prophet Muhammed in the Sahih Muslim which teaches:“Abu Said Al Khudri reported Allah’s messenger as saying: “gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt. (When a transaction is) like for like, payment being made on the spot, then, if anyone gives more or asks more, he has dealt in riba (usury), the receiver and the giver being equally guilty.”

This Hadith of Prophet Muhammed establishes two things:

ONE ‘money’ in Islam is either precious metals such as gold and silver, or commodities such as wheat, barley, dates and salt.

TWO when gold, silver, wheat, barley, dates and salt were used as money, their value was ‘inside’ and not outside’ the money. Hence, it is established that ‘money’ in Islam must possess intrinsic value.

(Imran N. Hosein, “Explaining the Disappearance of Money with Intrinsic Value”, paper delivered at the International Conference on the Gold Dinar Economy, held in Kuala Lumpur on 24 and 25 July 2007,. p. 1)

In sum, the US Treasury’s current policies threaten their own global credit standing. If that was to fall much further, the Treasury could be faced with an international call for debt repayments.

[The 100 Year Clearing!]

This Much Is Certain - It Can’t Go Much Further:

The process of the Fed creating new credit money at parabolic rates of increase and the US Treasury creating new debts through its budget deficits at equal, if not greater speed is not sustainable. It is a truism, a first principle in the markets, that whenever something rises in a parabolic fashion, the end is nigh and an enormous and violent opposite turn is on the horizon. Both the Fed with its US Dollar and the Treasury with its debts are today in that position. Strategically, that is classically a situation in which one should be entirely out of US Dollars and entirely out of US Treasury paper.

Future REVOLUTIONARY Global Changes:

There is a fork in the road straight ahead for the world. A turn will be made either to the left or to the right on this road. To go straight ahead as before will no longer be possible. The old monetary and economic path since 1944 was directed by the US Dollar at the centre of the western world’s monetary system. That was quickly spread to the whole world with every monetary system anchored to the US Dollar as the “reserve”. That path has run its course. It is no longer viable. The US has become economically addicted to placing its official debts on the balance sheets of the other central banks and its corporate debts inside other nations’ financial systems. All of them are, strangely enough, called “investments”. The rest of the world holds about $US 12 TRILLION “worth” of these “investments”.

For the US, debt issuance was painless. Instead of servicing the debts owed to foreigners with duly voted taxes, the Treasury borrowed the service payments and added them to the debts already there. This is why Americans have never economically noticed the real burden of their climbing external debts. They were never presented with the interest payments due on their federal tax bills.

[No clearing mechanism for the US (debt) dollar!]

People in many foreign nations have many times tried exactly this economic route when their own foreign debts had climbed too high and the burdens of making interest payments on them overwhelmed their economies. The IMF was called in, the government’s budget was slashed and taxes were raised. A surplus was created and then used to repay foreign official debts. Local interest rates were raised to stop credit expansion in its tracks and deflate the economy. As the IMF induced monetary and credit deflation took hold, internal prices (including wages) fell. That lowered the nation’s export prices so its imports contracted and its exports increased, swinging it into a trade surplus. The trade surplus was used to repay its foreign commercial debts.

In global financial terms, the US is facing a version of its own “IMF moment”. Its global creditors will soon arrive in Washington for the November 14-15 global economic summit. The future outline of a new monetary order is in sight. There will be three official reserve currencies - the US Dollar, the European Euro and China’s Yuan. Later, Latin America will follow with a fourth, albeit weaker, continent-sized reserve currency but only after the Latin American monetary union (similar to the one in Europe) has been brought to the fore. The central global point in all this is that for the first time since 1944 and Bretton Woods, the US will have lost its singular reserve currency status. Having lost it, the US Treasury and the US economy will have to pay interest on their foreign debts owed. Some of these international debts will have to be repaid in currencies from other nations, these debts no longer being repayable in US Dollars. Lastly, the US Fed will to have to hold foreign exchange reserves like all other central banks. It will have to hold official reserves in the money of the OTHER reserve currency nations.

[Will gold be a part of this?]

The last card in the IMF play book in dealing with countries with unrepayable foreign debts was to force a massive devaluation of that nation’s currency. This was done to lower its imports and force it to export more so as to service its external debts. The rest of the world can do this to the US Dollar by the simple means of selling a part of the $US 12 TRILLION they hold of US debt paper of all kinds.

[Seems like FreeGold would do the same thing. Or perhaps FreeGold is the natural outcome of this?...The clearing of all that US debt on the open market in the absence of an official clearing mechanism.]

From article: “The head of the International Monetary Fund, Dominique Strauss-Kahn, warned in an interview with the Financial Times that ‘expectations should not be oversold’ of a successor to the 1944 Bretton Woods system being agreed.

‘Things are not going to change overnight. Bretton Woods took two years to prepare … The words sound nice but we are not going to create a new international treaty,’ he said.”

Ender: So, which is it, 100 days or 700? Or… should the focus be on the last phrase – “we are not going to create a new international treaty”.

Seems to me that in the next few days we may all be able to compose a more detailed picture of the political will that has granted privileges to the dollar system above and beyond simple interest. What do they want? How will they get it?

From my point of view, they seem a little confused. On one hand, it appears they want to get out from under the master that they serve, yet on the other, not giving up on the right to be a master with servants themselves.

Gold will most likely not be discussed. Yet, world tightness in gold supply tends to hint that the servants do not know what master they will serve in the near future. The fear is that if you side with the loser, you lose currency value through the loss of ‘privileges’ while, at the same time, there may be no winner.

I look forward to reading your teachings. It seems you have insight that many would be better off getting to understand. Thank you for posting your thoughts in our ‘friends’ tribute blog.

I do hope that you will clarify me if my interpretation of your words is incorrect. I would like to find the meaning as clearly as possible.

You posted here (above):

“The old gold standard did not provide for the possibility that an increase of the ounces, kilograms, or tons of gold held in reserve by the bank administering the currency would lead to an increase in the currency’s value.

Hence, gold held in reserve by the bank administering the currency was not considered as a freely trading financial reserve…”

In other words, if you have 100 ounces of gold at a 10-to-1 fix, it supports 1000 currency notes in circulation. If you add another 100 ounces to the mix, because of the 10-to-1 fix, you get another 1000 currency notes in circulation. This effectively doubles the notes in circulation, which, in turn, gives twice as much currency chasing the same goods (and services) which will make the currency look half as appealing. Thus, adding to the reserve caused a growth in currency, which has the affect of dropping the value of each unit against the goods in the main economy.

This would lead to the first half of your next statement which effectively says that if the administrators add to their reserve, they effectively devalue the current notes in circulation.

The key thing to remember here is the function of the currency. When you add gold, you add currency. Also, the value of the currency is directly tied to the value of gold – irregardless of the functioning of the currency in the economy.

“…thereby preventing that each increase in the price of gold and thus increase in the value of the gold reserves of the currency would bring about an increase in the value of the currency itself.”

Again, if I can add, If the value of gold doubles, so does the currency. Yet the administrators of the currency are reluctant to add to their gold reserves because it directly devalues the notes in circulation.

So, in the fixed reserve system, you don’t really have a reserve – you just have more currency.

That seems fine, but the next steps seem a little unclear.

“Currencies can however only remain competitive if their value is not a fixed quantity of gold but is dependent upon the amount and value of the gold their administering bank holds in reserve.”

If at all possible, I need some clarification with the above statement (and the follow-on paragraph). If I’m reading this correctly, you’re saying that in order for a currency to be competitive, the value of the currency must be derived by the value of the gold held on reserve for that currency?

In the fixed system example above, it seemed that the value in the currency seemed to come from its function in the economy rather then its exchange for gold. Thus, it might follow that the same thing would happen with a currency system that marked their gold reserves to market rather then making a fixed exchange.

“In that case, the more gold the administering bank has in reserve and the more the price of gold increases, the higher will be the value of the currency administered by the bank.”

Seems to me, the higher the price and quantity of gold held in reserve for a currency is, the richer the banker gets. I don’t quite see the FreeGold in that.

“That’s FreeGold.”

Do you mean to say that in a system where gold is not fixed to currency, the administrators are free to use gold as a tool to support their currency? In such a system, the ‘value’ of gold can be used in a marked to market fashion to provide active settlement for some small portion of the currency at any time.

This act of using gold for settlement is what is attractive in the FreeGold system.

The act of using gold for settlement was also an attractive aspect of a fixed gold system.

Gold in the current system appears to be provided via the agreement of the Washington Accord and commitments that were entered into long ago (futures contracts). What happens when that gold stops flowing?

Another always talked about a currency trying to win oil backing. Oil backing seems to imply some gold settlement. Any currency that buys gold will most likely be considered as a viable currency. More importantly, any currency that buys a lot of gold or has a falling price of gold (over time) will be seen as a ‘strong’ candidate. Into those currencies is where oil will most likely flow. The political payoff is that if oil backs a currency, the usage of that currency will increase expanding the political influence for the administrators.

Ultimately, it is not the amount, or price, of the gold reserve that will give a currency its value, but rather the commitment to openly use the gold in a marked to market fashion to provide gold settlement, that will be attractive. By this token, mismanaged economies will be exposed with a rising gold price – weakening currency.

I am arguing that gold is a collateral in the form of a wealth reserve.

You are saying Ultimately, it is not the amount, or price, of the gold reserve that will give a currency its value, but rather the commitment to openly use the gold in a marked to market fashion to provide gold settlement, that will be attractive. By this token, mismanaged economies will be exposed with a rising gold price – weakening currency.

You are arguing that money should be convertible in gold.

If money is convertible in gold, then gold is convertible in moneywhich means that gold is moneywhich it is not, gold is wealth.

Fallacies not of language are those where a concept is understood incorrectly or ambiguously (those of language are those where an expression is used in different senses). (Juan Jose Sanguineti, “Logic”, Manila, Sinag-Tala Publishers, (first published in 1982 in Spanish by the Ediciones Universidad de Navarra), 1992. p. 168)

One of the fallacies not of language is the fallacy which introduces confusion between what is true “simpliciter” and what is true “secundum quid”.A quality is predicated simpliciter (or absolutely} of a subject when it belongs to its very nature;it is predicated “secundum quid” (in a certain sense) when it pertains to the subject under some particular aspect. For example, a robber as such is evil “simpliciter”, but as a man, he is good.(Sanguineti, op. cit., pp. 170 -171)

The fallacy of “secundum quid” is otherwise known as the hasty generalisation. Whenever a generalisation is reached on the basis of a very few and possibly unrepresentative cases, the fallacy is committed. It takes the argument from particular cases to a general rule on the basis of inadequate evidence. [...] The fallacy lies in the assumption of material which ought to be established.(Madsen Pirie, “How to Win Every Argument – The Use and Abuse of Logic”, Continuum Books, 2006, p. 145 )

Your differentiation of truths reminds me of the difference between inductive and deductive reasoning or logic. The wiki explanations are surprisingly clear.

A good example of this is that Keynesian Economics relies on inductive logic, while Austrian Economics is based on deductive reasoning.

And regarding your statement,

"If money is convertible in gold, then gold is convertible in moneywhich means that gold is moneywhich it is not, gold is wealth.",...

can you reconcile this with FOA's statement below which you quoted on another blog?...

"The secret to all of this is in the "Legal Tender laws". Allowing gold to be used as a Legal Tender,,,, "for the settlement of all debts public and private",, but changing international law such that no form of debt can force it's payment in gold! This opens a one way street for gold and a two way street in fiat currencies. No one will lend gold because they cannot force it's return in the courts, thereby making gold a physical only international currency. Yet, on the other hand, we all must borrow in this modern world and currencies will be the only avenue for this. Creating a demand (and added value) for them in addition to general use demand.

I like the idea that gold would be legally allowed for payment of debts, but could not be required to be received as payment. It has an elegance, does it not?

Perhaps I'm reading too much into this, but I think he's saying there might be some printin' goin' on...

Brand new 20’s

So far, we have not had a rash of bank closures. But we clearly remember the stories of people hoarding big sums of cash during Sept and Oct this year. I have an interesting example. I go to my local China Mart (Walmart) and pull $500 from the ATM. The entire stack is brand new $20 bills that literally look like one big thick piece of money – a little brick. The bills have clearly never been folded even once. I kept some of these as a curiosity unfolded.

But, as I go back to the ATM several more times over the weeks, every single bill is brand spanking new. There are not even a few used ones in there. Previously they were normal used bills.

One thing this suggests is that people are madly sucking up all the cash out there, and the Fed is just pumping out as much cash as they can to prevent a cash shortage. I remember stories last year of banks putting low limits on cash withdrawals from branches – Citi for example put a $2000 daily limit on cash withdrawals as I recall last December.

My point here is that we have barely averted a world bank run, although there have been a few in various countries like the UK, and US, Russia, and in Germany and others. This Sept and Oct we had two distinct world scares about bank runs that were only averted when the big US $700 bailout was approved. When Paulson stated there were only days to act, he was right.

So, the fact is, even though we have escaped a world bank run 4 times so far in the last year, I think everyone should be ready for one.What can happen in bank runs

Banks have crowds banging down their doors

Banks put limits on cash withdrawals

The Fed states they will infuse as much cash from regional depositories to banks that need it, but not a few times this proved insufficient and braches still ran out of cash. I have read numerous stories about people going into branches and seeing clearly nervous tellers and branch managers trying to stay calm when they asked for several thousand dollars. This is all in recent weeks.

Banks end up putting limits on electronic withdrawals as well, the cash rush spills into the electronic realm. I have read cases where cashier’s checks were refused by other banks.

An interesting situation about actual cash is that most of the money out in the world is electronic. I.e. people have electronic access to brokerage accounts, bank accounts, etc. Even most people have money electronically deposited from their employers. The point is, if the electronic accounts get frozen, even for only a few days, everyone rushes to get actual cash. And there is not nearly enough of that physically existing compared to the total of electronic balances.

So, there is a real chance that all the world economies might have a rush to cash in a world bank ‘run’, which as I said has just about happened 3 or 4 times since Aug 07. In this case, I can see possibly every major economy literally running out of the bills. The only money left at that point would be electronic. Obviously, the central banks would print more furiously, but it might not be fast enough to overcome the ongoing rush to actual cash.

If that appeared to happen, that the only money left in the system was electronic, then, if that was frozen, there would be no money available to buy things with. Now, I know this is a radical theory, but I do believe it’s quite possible the world could have a total freeze up in money across the world. The main idea here is that the electronic forms of money outweigh the actual currency by maybe 100 times or more.

Once confidence broke down enough, banks would stop accepting even electronic payments and transfers from other banks, because they doubt their solvency. Electronic transfers are done nightly between banks. So, even electronic money can be locked up. This actually started to happen in September, where some people’s credit cards and ATM cards were being refused either by merchants or by the banks themselves. So, the question is, how bad could a real world bank run get?

No need for haste. There is time in the day to discuss all things important.

If I have a barn full of chickens in the quantity and quality matching my neighbor, yet I have an ounce of gold on reserve for every chicken, does that make my chickens better?

As you have seen, I am a simple man that can overly simply complex situations. Yet, setting that aside, I recognize that I am limited by my cultural ties – it colors my perspective. That, I hope, you can help me overcome.

If the gold held on reserve is collateral, then we should look closely at collateral. At Dictionary.com, an interpretation is that collateral is “security pledged for the payment of a loan” (but that is not the only definition).

Looking back at my seemly overly complex conclusion, I made reference that in a FreeGold system those administering the currency would have to “commitment to openly use the gold”. It would seem that we view the same picture yet describe it differently. In both cases, there is intent to use gold.

“You are arguing that money should be convertible in gold.” Sort of, I might change this to suggest that gold should be available for purchase just like anything else.

If a currency can purchase gold,Then that currency can be converted into wealth,Which means that currency is usable,Which gives function to that currency.

I generally refrain from using the term “money” in relation to currency simply because the term money implies a store of value (or wealth reserve) which currencies don’t provide in any reasonable fashion.

Do my words make a little more sense? There is more in that little paragraph that can be ‘called to the table’.

I am looking forward to the adventure “How do you know that gold is convertible or that gold is hedge?” Yet I’m hoping you don’t get to far ahead of me.

“Utter piffle,” is how Terence Blacker of The Independent describes it. He is the voice of Fair Reason. To him, the idea that the sky is falling now is an “insult to past generations who have faced more grievous threats with courage and calm.” But that’s the trouble with Fair Reason; she never looks up. Like the wife who thinks her husband ‘would never do something that,’ she’s appalled when she finally sees what he’s been up to.

Nassim Taleb has made a career out of warning people. His “Taleb distribution” describes the occasional apocalypse: usually, things happen in a respectable, bell curve kind of way…the way Fair Reason thinks they should…and then, all Hell breaks loose.

The last time the sky fell was 96 years ago. Few saw it coming; no one panicked. But panic wouldn’t exist if it weren’t a useful instinct from time to time. The celestial bricks came unglued in August 1914. By 1918, 40 million people had died. But that was just the beginning. WWI bankrupted or destroyed almost every major government of Europe. The plumy families that had dominated the continent for centuries – the Hohenzollerns, the Romanoffs, the Hapsburgs – were all clobbered. The Ottoman Turks fared no better. Then, scarcely 20 years later, France’s Third Republic was another victim…and so was Germany’s Third Reich.

But that was only the half of it. Between the two wars, came hyperinflation and destitution in Germany, America’s Great Depression and something far more deadly – the world’s worst plague, the Great Flu Epidemic of 1918-1920. The illness is known to us by its WWI alias, the “Spanish Flu.” Propagandists didn’t want the world to know how many French, American and English soldiers were dying of the disease. So they referred to it as though it only wiped out Iberians.

First spotted in young soldiers at Fort Riley, Kansas, the virus was soon found almost all over the world. Japan was the only major population center spared. Curiously, the disease killed off young adults more often than old people or children – somehow turning a strong immune system against its owner in what scientists call a “cytokine storm.” How many people gave up the ghost? Estimates range from 20 million on the low side to 80 million top end – that is, at least twice as many people who had died in the war.

Before the 1914-1945 catastrophe was the 1789-1812 calamity – roughly the period from the French Revolution to the Battle of Waterloo. It not only included the collapse of five different forms of government in France – Monarchy, First Republic, Directory, Consulate, and First Empire – but also inflation, 3 currency collapses, major political debacles throughout Europe, the Napoleonic Wars, as well as the last major famine in France in 1795.

War, bankruptcy, chaos, plague and famine – when trouble comes, it comes with a mob at its back. As usual, the Greeks provided an early example. Athens must have been the Goldman Sachs of the classical world. But when these masters of the ancient universe tried a hostile takeover of Sparta, it failed miserably…leaving them as exposed Bear Stearns. Sparta counterattacked and laid siege. Then, the bugs joined the attack in 430 BC. Thousands were killed by plague – including Pericles himself. Weakened by disease, hunger and war, Athens surrendered, was enslaved, and the Golden Age was over.

Later, it was the Romans’ turn. Bankruptcy, wars, stupidity – all took their toll. Then, in the 6th century, came another major onslaught: disease. Of the 80 monasteries around Constantinople in 540AD, none survived. Ghost ships, in which everyone on board had died of plague, drifted in the Mediterranean. European civilization seemed to fall apart.

Again, in the 14th century, came 100 years of war in France…along with starvation and plague. A couple of cold, wet summers caused famine in Western Europe. Young children were abandoned. Old people starved themselves to free up food for their families. Meanwhile, the Mongols attacked in the East, hoping to conquer all of Europe. And when they retreated, they left a going-away present – the plague. The Black Death of 1347-1351 killed off more people than the war or the Great Famine of 1315. Towns and fields were abandoned as a third of the population died. “So many died that all believed it was the end of the world,” said Agnolo di Tura of Siena, who buried his five children with his own hands.

New Scientist magazine comments: “Many people dismiss any talk of collapse as akin to the street corner prophet warning that the end is nigh.” But, more and more scientists are taking the end of civilization threat seriously, the magazine continues. Complexity – such as derivative financial instruments and “just in time” inventory systems – is making “our society…ever more vulnerable.”

In his 1988 book, The Collapse of Complex Societies , Joseph Tainter argued that all societies – like all organisms – are doomed. Each challenge requires a solution. Each solution takes resources. Eventually, the solutions – and readers may substitute the word “bailout” for solution – brings more challenges and takes more resources. Eventually, the system collapses under the weight of if all.

But I do not think that we will see the time when either of those two great economic powers, the United States and the European Union, will ever again fix their respective currencies to gold as they have in the past. More likely, gold will be used at some point, maybe in 10 or 15 years when it has been banalized among central bankers, and they are not so timid to speak about its use as an asset that can circulate between central banks. Not necessarily at a fixed price, but a market price.

The more countries start to think about gold as an index, as a warning signal of inflation, the more the monetary authority will try to keep the price of gold from rising. Imagine that tomorrow the price of gold rises form $350 to $400. Don't you think that immediately the Fed will see that as a signal of an increase in inflationary expectations and the need to tighten? Europe has already done that. There are long periods when it appears that Europeans have been stabilizing gold whenever the dollar has been depreciating against gold. This will be a major factor in moderating the exchange rate fluctuations between these two great blocks. This is vital to Europe, because nothing could make Europe more uncomfortable than to have big fluctuations in the Dollar-Euro exchange rate. Looking at gold would be one way to circumscribe these fluctuations.

Robert Alexander Mundell C.C. (born October 24, 1932) is a professor of economics at Columbia University.

Notable awards -- Nobel Prize in Economics (1999)

Among his major contributions are:

Theoretical work on optimum currency areas. Contributions to the development of the euro Helped start the movement known as supply-side economics. Historical research on the operation of the gold standard in different eras. Predicted the inflation of the 1970s.

His analysis led to his conclusion that it was a disagreement between Europe and the United States over the rate of inflation, partially to finance the Vietnam War, and that Bretton Woods disintegrated because of the undervaluing of gold and the consequent monetary discipline breakdown. There is a famous point/counter-point over this issue between Mundell and Milton Friedman.

This work would later lead to the creation of the euro, and his prediction that leaving the Bretton Woods system would lead to "stagflation" so long as highly progressive income tax rates applied. In 1974 he advocated a drastic tax reduction and a flattening of income tax rates.

Mundell, though lionized by some conservatives, has many of his harshest critics from the right: he denies the need for a fixed gold based currency or currency board though he often recommends this as a policy in hyper-inflationary environments - and he is both a fiscal and balance of payments deficit hawk. He is well known for stating that in a floating exchange rate system, expansion of the money supply can only come about through a positive balance of payments.

Robert Mundell has appeared on CBS's Late Show with David Letterman. His first appearance was in October 2002 where he gave The Top 10 List on "Ways My Life has Changed Since Winning the Nobel Prize." In March of 2004 he told "You might be a redneck" jokes followed in May of 2004 with "Yo Mama" jokes. In September of 2004 he appeared again, this time to read excerpts from Paris Hilton's memoir at random moments throughout the show. In November of 2005 he told a series of Rodney Dangerfield's jokes. On February 7, 2006 he read Grammy Award nominated song lyrics, the night before CBS aired the 48th Grammy Awards.

Robert Mundell has also appeared on China Central Television's popular Lecture Room series.

The Evolution of the International Monetary System and Its Relationship with China 9/6/2006 Beijing, China

Robert Mundell gave a report entitled "The Evolution of the International Monetary System and Its Relationship with China" at the Capital University of Economics and Business in Beijing.

As a French adjective, it means “qui est latéral par rapport à quelque chose”, “which is on the side of something”.

Give me your hand on your and my side and we’ll walk together.(They used to have a poster called “Invisible Hand” at usagold.com/cpmforum)

Two roads diverged in a yellow wood,And sorry I could not travel bothAnd be one traveler, long I stoodAnd looked down one as far as I couldTo where it bent in the undergrowth[...]I shall be telling this with a sighSomewhere ages and ages hence:Two roads diverged in a wood, and I--I took the one less traveled by,And that has made all the difference.http://www.usagold.com/goldtrail/archives/goldtrailone.htmlquote from Robert Frost (1874 - 1963) on top of the page.

Lemme see if I can tell the Mona Lisa-story again.

Ender, I want FreeGold “now”. That’s why I’m in a hurry.

When human intelligence is confronted with the highest truths, it is in the same situation as the bat who is dazzled by the light of the sun, writes Aristotle in lines 993b9-11 of his Metaphysics.For Thomas Aquinas, in the Preface to his “Commentary on the Book of Causes” (Super Librum De Causis Expositio), this bat becomes an owl whose eye cannot perceive the sunlight well because of the sun’s intense brightness.http://bphouse.com/honest_money/freegold-versus-imf/on top of the page

Alejandro Llano, “Gnoseology”, Manila, Sing-Tala, 2001 (the original Spanish-language edition of this book was published in 1983 by Ediciones Universidad de Navarra)

p. xMetaphysical realism asserts the primacy of being over thinking. […]The fundamental basis of realism is not to be found in the works of ancient or modern philosophers.It is derived from things themselves which are the object of our knowledge and the subject of our language.

p. 3The genuine critical position attempts to examine our knowledge, in order to bring it more into conformity with being.

Ivo:Look at Aquinas’ definition of Truth on top of my bloghttp://bphouse.com/honest_money/

Advocating critical realism means that one considers knowledge to be an immanent activity in/by/through which I am perfecting myself through the conscious possession of objective and subjective reality.

Ivo : epistemelogy or gnoseology ?“episteme” is “science” in Greek“gnosis” is “knowledge” in Greek

25 years ago I was taught a course in “ken- en wetenschapsleer” or “kennisleer en wetenschapsleer” by one of Van Steenberghen’s students.“kennis” is “knowledge” in Dutch“wetenschap” is “science” in Dutch”leer” is “teaching”.

Llano says the correct name is “gnoseologia”.Van Steenberghen seems to admit this, but nevertheless continues using “épistémologie”.

Ender (usagold.com 10November2008; 13:34) @Sir KnallGold http://www.usagold.com/cpmforum/SNIPHopefully, this G20 meeting will be productive with regards to rebuilding confidence. That confidence is vital for the function of currency and the support of trade. The mere fact that the meeting is taking place supports the stand that confidence is in question. Yet, we shall see…UNSNIP

The euro, probably more than any other currency, represents the mutual confidence at the heart of our community, said Duisenberg.

If there is no confidence, there can be no currency.

At that moment, there are only the gold and oil and gas reserves.

In the next paragraphs, I am just thinking.

In what currency do you want to convert the reserves?ORYou are sort of arguing that money should be convertible into gold, aren’t you?So you are not arguing that gold and oil and gas should be convertible into currency?

But, you wrote here that you might change this to suggest that gold should be available for purchase just like anything else.

Ivo: you might change this to suggest that currency could purchase gold, that is,that currency would be convertible into gold?

You are sort of arguing that money should be convertible into gold, aren’t you?

Sorry, I am interested in finding out (the) Truth about reality (not a about your thinking, although your thinking is greatly helping me, thank you for that.)

I'm not sure I understand how a CB merely holding gold as a wealth asset can affect the value of a currency. Gold must have the ability to interact with currencies. If, on the other hand, gold is held as an exchange reserve, (not as backing), then with a rising gold price, ever smaller weights of gold can be used to defend that currencies' value through open market exchanges. And in this valuable role, gold will attain it's true value and also be a true wealth asset to the common man. It is in this relationship, where the common man highly values the reserve held by a currency, that the currency will gain strength and gold will achieve it's true value in relation to that currency.

If the market senses too much of a currency in circulation and then the value of that currency starts falling, the CB can buy back some of that weakened currency with a small amount of it's gold reserves, thereby increasing the value of the currency.

And if a currency rises in value, the CB can print more and use it to purchase more gold reserves on the open market. That will lower the value of the currency.

Holding a wealth asset like the Mona Lisa might make a nation wealthy, but it doesn't do much for it's currency. If it did, then countries with the most "stuff" should have the strongest currencies. But it doesn't work like that. Currencies are valued by their usefulness. So CB gold must have some use in relation to the currency to have an affect on it's value.

I understand your differentiation of a currency and a wealth reserve. But it seems like you are making the argument TO the CB's like the GCC, that FreeGold will be beneficial to their currency if it is held solely as a wealth reserve.

But it seems like, for it to have an effect on the value of the currency, it must have the ability to interact with the currency.

It also seems like the more uses gold has, the more value it has. I think it already is only a wealth reserve. Aren't we hoping for it to be more than that? Aren't we hoping for it to interact freely with world currencies to keep them in check?

Gresham's law is commonly stated: "Bad money drives out good."Gresham's law applies specifically when there are two forms of commodity money in circulation which are forced, by the application of legal-tender laws, to be respected as having face values in a fixed-ratio for marketplace transactions.http://en.wikipedia.org/wiki/Gresham%27s_Law

I CONTINUE THIS WIKIPEDIA REASONING (WHICH I MAY CONTRADICT IN A MOMENT)

You are saying, tell me if I am misinterpreting:It is in this relationship, i.e., the relationship of a CB merely holding gold as a wealth asset, where the common man highly values the reserve held by a currency, that the currency will gain strength and gold will achieve it's true value in relation to that currency.

Are you not forgetting, that Gresham’s law will “come into application” and drive the currency into the reserves, PROVIDED THERE IS ANOTHER (WEAKER) COMMODITY MONEY?

You continue:If the market senses too much of a currency in circulation and then the value of that currency starts falling, the CB can buy back some of that weakened currency with a small amount of it's gold reserves, thereby increasing the value of the currency

Are you not forgetting, that Gresham’s law will “come into application” and that this currency, if it is the weaker COMMODITY currency, will drive the other COMMODITY currency into the reserves?

What happens in fact to Gresham’s law, if there is only one commodity currency?

HERE I MAY THUS BE CONTRADICTiNG THE WIKIPIDIA REASONING

The index to Dr Reisman says that the reverse of Gresham’s law is true under free competition.

The index refers to p. 511 where Reisman teaches that as inflation becomes perceived as a serious problem, a growing demand for gold and silver develops as an “inflation hedge” – i.e., as a store of value. Once this demand reaches a certain level, the stage becomes set for a “spontaneous remonetization of precious metals”.+It should be realized that the remonetization of the precious metals would be greatly accelerated if they were allowed to compete with paper money freely.(George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois, Jameson books, 1998. 3rd ed,, p. 511)

For Reisman, inflation hedge and store of value is the same thing.

For me, those are two clearly different things.

Who holds the Truth? Reisman or me?

Dr Rothbard also writes that Gresham’s Law is only applicable when government intervenes in monetary matters in order to debase currency.

Rothbard goes on to argue that Gresham’s Law should be rewritten as “Money overvalued by the State will drive money undervalued by the State out of circulation”.(Murray N. Rothbard, “Man, Economy, and State – A Treatise on Economics”, Auburn, Alabama: Ludwig von Mises Institute 2001, (originally published 1962), ,p. 783)

FOA (2/26/2000; 11:13:56MT - usagold.com msg#7)Foundationhttp://www.usagold.com/goldtrail/archives/goldtrailone.htmlSNIPThe secret to all of this is in the "Legal Tender laws". Allowing gold to be used as a Legal Tender,,,, "for the settlement of all debts public and private",, but changing international law such that no form of debt can force it's payment in gold! This opens a one way street for gold and a two way street in fiat currencies. No one will lend gold because they cannot force it's return in the courts, thereby making gold a physical only international currency. Yet, on the other hand, we all must borrow in this modern world and currencies will be the only avenue for this. Creating a demand (and added value) for them in addition to general use demand.

Ivo:If we have legal tender laws, then we have no more free competitionand then Gresham’s would again be applicable.

FOFOA, I apologize for not saying this earlier, but thank you for allowing the conversation here. By the way, is there any way to move the comment posting code to the bottom of this page so as to free up a little more screen space for conversation?

And, Ivo cerckel, thank you. Reading your words makes mine appear hollow. As an example, in a way, it seems that we are both looking at the color Red. At the simplistic, boiled down center of it all, it is a color. Yet, so is crimson red, apple red, or Pinot Noir. The difference here is not so much that we’re still talking about the color red, but now we get to experience not only a shade, but the warmth (or feeling) of the color. Crimson invokes a different feeling then Pinot Noir. I am grateful for this insight.

I am also hoping to explore your realization of ‘money.’ Your thinking above “You are sort of arguing that money should be convertible into gold, aren’t you?So you are not arguing that gold and oil and gas should be convertible into currency?” Hints that an understanding of money is in order.

To take a sip of it, there are well-defined technical specifications that define ‘money’ yet, if people do not feel an attachment to it, a desire to use it, a sense of confidence, it will not serve as money. Perception is important. An emotional (human) link exists that is not really talked about that must be present in order for money to function.

Likewise, what currently qualifies as wealth carries many of the same attributes – these human attributes. The environment, skills and abilities of a person tends to shape how they view what represents wealth.

Creating a gold reserve may then lead towards not only storing away something with actual value, but one that provides the link to the human perception of value. Having a ‘stable’ gold reserve in a form that humans can deem precious leads the desire of wanting a positive association. In a sense, the gold reserve provides the ‘wow’ factor.

I hope that I am reading your intent correctly. It is not my intention to change your words, but simply to understand them. Words provide color, yet it is harder to see the ‘warmth.’

I find that differing views often turn out to be merely semantic. Words like money, currency, wealth, reserve, and "commodity money" can be confusing if not clearly defined.

That said, I must say that I agree with Reisman and Rothbard based on the small amount that you posted.

If I may refer back to my article above, I view gold as it is used in Fekete's Middle Age fairs. The "scrip money" represents fiat currency, and gold represents final payment. Of course a big difference is that today fiats are not self-liquidating.

Nevertheless, using gold as a final settlement of any trade imbalance (deficit or surplus) does not diminish its use as a wealth reserve. It enhances it.

The key to Gresham's Law, as Murray Rothbard points out, is that a fraud is perpetrated by the State, creating an imbalance in the system. Under FreeGold, the price of gold would rise to the heights at which you would gladly trade gold for fiat (if you needed fiat for use) or fiat for gold (if you wanted to "park your wealth for a while"). Once a state embarks on currency fraud, that state runs the risk of being exposed by FreeGold as the debased currency becomes quickly unloved. And allowing the use of gold in the settlement of debt makes it a risk free move to get out of the debased currency and into gold.

It is true that the current Legal Tender laws are the problem. But as I see it, if those laws were expanded to allow the settlement of debts in gold, the whole system would change and FreeGold would be the result.

If this were the case, then gold would become the desired reserve of both individuals AND CB's, for it is the only reserve you can hold which can a.)settle your debts, b.) not be debased by a rogue state, and c.) be used to defend your own fiat currency.

On 9/3/98 in a reply to "Steve", Another said,

"The potential exists for the return of gold as the "only" reserve currency. This may result from a failure of the Euro, due to a massive upheaval. Oil states, they have the ability to force this outcome. During this result, all paper will burn and the world economy will start over."

And then in the same posting, to "Mr. Steel" he said,

"A currency losses value because persons do not want to use it for commerce or savings. During the times of "distress", this "value loss" does happen because citizens are selling the paper for other currencies or they are exchanging it for "things". In times past, a currency becomes "bad" because the government is no longer trusted to maintain the value of paper money. In your process, noone would take a paper gold receipt from a government if the gold could not be removed. Treasuries are known to cheat more than the once! If the paper receipts cannot bring gold, they become as "plain paper money". The Treasury say, "I print no more than amount equal to gold", but then they print more " as a temporary, emergency, measure", but then there be no end to emergencies, Yes?

My proposition: Revalue gold to represent all currencies. Perhaps many thousands US/oz. and all governments buy and sell gold for these currencies, in the open."

In my understanding, the fiat currencies would be in constant competition with gold. However, they would easily win the competition for usage in trade so long as the state was honest, and they would always lose the competition for long-term wealth storage. And in this careful balance orchestrated by the free market for gold lies FreeGold.

Your "money" will always be convertible back and forth because in FreeGold, the price of gold will be correct, and therefore the supply and demand will be in balance. The difference, both on the personal level and on the nation-state level, is that surpluses (or "savings") will always want gold, and fast moving commerce will always want fiat for the convenience factor.

I said:FreeGold in the central banks’ strong-rooms has the same role to fulfill as the Mona Lisa in the Louvre.Just as the Mona Lisa never was the backing of the franc (nor is the Mona Lisa at present the backing of the euro), and just as the French government never was concerned with the Mona Lisa’s actual currency value, so do FreeGold advocates think about Gold.

I quoted Dr George Reisman:As inflation becomes perceived as a serious problem, a growing demand for gold and silver develops as an “inflation hedge” – i.e., as a store of value. Once this demand reaches a certain level, the stage becomes set for a “spontaneous remonetization of precious metals”.+It should be realized that the remonetization of the precious metals would be greatly accelerated if they were allowed to compete with paper money freely.(George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois, Jameson books, 1998. 3rd ed,, p. 511)

For Dr Reisman, gold is thus both a hedge and wealth (store of value).

For me, gold is wealth only.

Leonardo advises to reply to Dr Reisman as follows:

The problem with Dr Reisman’s analysis is that he wants to keep the doors open to the money changers so that their fraternity can parasite on the productive individuals.

The Mona Lisa is not a hedge. The marking to market of the freely floating Mona Lisa demonstrates the quality (good or bad) of the monetary management.

In the house of each us, there is a golden Mona Lisa through which we consolidate the purchasing power of our wealth. If and when necessary, this purchasing power can be converted into currency.

A hedge’s function/purpose is to be a tool for manipulative intervention by the money-changers’ fraternity in order to parasite on the productive individuals.

Previously, we were thinking about hedging against all kinds of disaster.

Our imagination will reroute this. It is the values we advocate/hold which will determine the new route.

Each of these values is not simply some vague laudatory term. Some things have value only as a means to something else that is valuable. And some things have a value of their own, an intrinsic value. This notion of intrinsic value is the basic one; other kinds of value exist by their relation to intrinsic value. (Robert Nozick, “The Examined Life – Philosophical Meditations”, Simon & Schuster, 1998, p. 162)

You and I both want something called FreeGold, though perhaps we differ in the definition.

I see FreeGold as the unavoidable end to this crisis. I see it coming one of two ways. In one way, FreeGold will emerge from the rubble of a ruined world economy, naturally. In the other way, it is possible that it is embraced by one or more nation-state entities before the economy is totally ruined. Under this scenario, FreeGold would have a chance to salvage some of what remains.

In my FreeGold world, gold is remonetized. Once again it will be legal to settle debts directly in gold, without changing to fiat first. This subtle change would cause a chain reaction of events that would end in a price of gold that is high enough that the existing amount of gold is more than enough to soak up the world's surpluses, it's wealth, and it's savings.

So while I see my idea of FreeGold emerging by default in the end, the overt change I would hope for is the legal remonetization of gold by one or more of the major nation-states.

One way I can see this happening is for one or more of the world's "producing economies" (as opposed to the "net consuming economies") to accept payment of gold for their goods. This could come about as they tire of accepting dollars. Or as the problem of Letters of Credit gets worse.

Another talked about oil bidding for gold. If the oil producing countries or China were to begin accepting gold in payment, that would instantly raise the price of gold and kill the dollar's reserve function. Countries would be freed from having to buy dollars before they can buy what they need.

The arbitrage effect of this would take the price of gold to the moon.

Right now, it seems like the game is to find or create a new currency to take the place of the dollar's reserve function. Many think this should be a basket of fiats. Others think it should be a new regional fiat. Some think that "backing" a new fiat with gold will be enough to achieve this.

But the bottom line is that the medium that everyone is looking for already exists. Problem, it takes away the power of the printing press, but then again, how can the world decide who should have that power?

This weekend, the world starts working on this puzzle. And the solution is right in front of them, though they will probably not see it.

In the next couple months, all value will be called into question on the paper side.Alternatives to the USDollar as global reserve currency are soon to be discussed and even tested. Implications to global commerce are huge and all-encompassing. Gold and silver will emerge as the primary store of value, in undisputable manner. The new global masters, from the credit side and not from the debtor side, will not permit any confiscation of gold or silver to occur. Desperate attempts might be seen by the US/UK failed team, certain to reveal their impotence. Gold & silver will emerge from these smoldering ashes of bank ruins (seen clearly as unfolding) as survivors of stored value. The next round of economic decline will occur outside the financial sector, and serve as exclamation points for the need to find true value. VALUE IS ULTIMATELY FOUND IN GOLD & SILVER.Link

I’m starting to feel upside down and inside out. You must see me as walking backwards, but proceeding in the correct direction. You might say I’ve been “Forrest Gumping” my way through it. Rereading the postings above, I can’t help but chuckle.

It seems the root of it is that – gold is wealth reserve.

Everything else is simply derivative thereof.Everything else makes for a good discussion.

Ok, well maybe, not everything and I do believe chicken is on the menu.

Chickens with no wealth reserve are a fraud. FOFOA, this now makes sense to me. I do support Ivo cerckel’s point of view here: “The reason is that in that case, the owner of barn has no wealth-reserve. She cannot convert the currency she makes from the barn into wealth.” You see, the point of view is not that the gold gives the chickens credibility, but that if the chicken’s were not fraudulent, than the farmer would have a gold reserve. The gold reserve shows that the chickens are not fraudulent, or rather, they are chickens that have proven their value. The wealth displayed by the owner shows that her chickens are to be had.

That may be too many words.

A currency with no gold reserve can be seen as a currency that does not make the economic unit wealthy.

Conversely, a currency with a gold reserve has already proven its value.

I can almost hear a chuckle on your end regarding my tendency toward over simplification.

Above: “Ender, I want FreeGold “now”. That’s why I’m in a hurry.” … The more I think about this, the more I’m starting to believe that A fundamental aspect of the Freegold concept must come from outside the political organizations that laid the foundation. One cannot dictate what is considered a wealth reserve, but it must find its own feet to stand on. CBs stepping in to buy gold will just find their coffers full in a world where gold is a hedge and not a wealth reserve. Rather, the perception of the function of gold must change in the minds of people. In this case, the CBs will not be able to acquire it at any price!

If you agree, your quest – our quest - is truly noble and politics is but a sideshow.

When one can afford to have goldmetal-wealth-reserve in the vault,...WHAT DOES THAT MEANS !?

Answer : I am a good and stable wealth producer.

This goes for small and big private individuals as for nationstates.

What does it mean when one can increase one's goldmetal-wealth-reserve ?

Answer : I am better than the others who have to sell their goldmetal-wealth-reserve. My currency is a better store of temporary wealth than the other currencies. The rise in goldmetal tonnage shows this for everyone to see.

FOFOA, In a slightly different color, if one acquires the chickens provided by an issuer that clearly holds a wealth reserve he need not worry about the chickens because the wealth reserve demonstrates that the chickens do not go home to roost.

Once again, thank you for your willingness to help me see the painting from a slightly different perspective. I will put further thought into developing this perspective and growing my understanding.

Above, you wrote: “Sorry, I am interested in finding out (the) Truth about reality (not a about your thinking, although your thinking is greatly helping me, thank you for that.)”

Thus, I will share a little regarding observations I have made in my own environment with the idea that it may be relevant to your quest. I will try to be objective.

When I talk to people in my environment, it’s all (100%) about the chickens. The wealth of the farmer means nothing. The reserve simply is, flat out, not trusted and not considered. The chickens that ‘look’ the best are used.

It’s mainly an issue of ‘show.’ As an example, someone is perceived to be ‘wealthy’ if they can purchase items above and beyond what is functional or practical. For instance, you can buy jeans for 20 bucks that work great. For, say, 60 bucks, you can get jeans that fit great, look great and function as well as the cheap ones. Yet, it’s the people that shell out 200 bucks for the jeans that are as good as the 60 dollar pair yet the expensive one comes with a designer label – that is clearly recognizable. The impression is – wow, they can afford designer jeans, they must be ‘wealthy’ because they have money to burn!

This concept transfers across the board. The guy that wants to look ‘wealthy’ may buy a truck that you need a ladder to climb into that everyone knows only gets 4 mile per gallon. The thought is once again, wow he can afford to buy and drive something so amazingly impractical, he must be ‘wealthy.’

In houses – wow they can afford a McMansion with stain glass windows, when everyone knows a modest house would work just as well.

But it gets better. As an observer, it’s not easy to validate who can really afford the extravagance.

In the McMansion situation, bankers reduced the cost of money and terms of repayment down to the point where a well off person could acquire the ‘look’ of a wealthy person. Looking at two McMansions, side by side, the impression is, these people must be wealthy to live here, but the hidden reality is that many of them are… faking it.

Likewise, with the monster truck, the guy probably lives in a shack or gives up other necessities that would greatly increase the quality of his life (or his family’s life).

Technology helps with the faking process.

If you want to look wealthy by sporting a 2 karat diamond in a thin platinum ring, who’s to know the difference if you buy, for pennies on the dollar, a platinum plated sterling silver ring with a cubic zirconium that sparkles like the real thing?

There is a huge drive towards the show, rather then what is real. It’s like having a beautiful chicken that sings the blues while flashing its dazzling colors, but it doesn’t lay eggs.

It seems to me that the rest of the world may be lining up to call this bluff.

If it’s ‘as simple as that’ the leap might be made that the reason for the Washington Agreement to sell gold would be to make the Euro look weak. In other words, the currency is so weak they have to use the reserves to prop it up. Meanwhile, as they make that currency look bad, the gold reserves have the effect of making the dollar look better – it’s tied to the exchange of gold.

Thus, will CBs buy and sell gold in a turbulent market? It would seem that the ones that want to appear weak will.

Just started reading your blog less than a month ago. Truly eye-opening; very much appreciate you sharing these insights.

I read an article on Freeman online regarding trade deficits (http://www.thefreemanonline.org/columns/thoughts-on-freedom-a-deficit-of-understanding-ii/) and thought the Freeman author could benefit from the insights in this particular post (100 Year Clearing), so I commented there and linked to this post.

If you ever get time, would love to have you look over my comment there and let me know if I'm understanding your post correctly.

Your comment to Boudreaux is very good. I hope he responds. I think you are definitely on the right track. My only advice is to study Freegold more, and how it takes care of the trade imbalance on its own, on a micro level instead of a national level. I don't think that understanding Freegold is essential to making it happen. It is the natural conclusion to what we are going through right now, no matter what any superpower tries. But I believe that understanding it will help little people like you and me to profit immensely through this transition. It took me 6 months of reading Another and FOA to understand the basics. And it has taken me a year and a half to realize the sheer gravity of what is happening. I may be wrong. But I don't think I am. And I hope that my blog helps a few others to see what I see on a faster timeline!

Here are a few comments I wrote down while reading Boudreaux's piece, not so different from yours...

Not quite. Only as long as the dollar remains the global reserve currency. Otherwise the US owes real goods for those dollars. Therefore they are real national debt. This is a US$-as-perpetual-reserve-currency argument.

"Likewise, no debt is created if foreigners use their dollars to buy ownership shares in American companies or if they buy real estate in the United States."

This is using the Biblical forbiddance of usury argument, which is the same as the "Islamic banking" principle of riba. Lenders should share in the success or failure of the debtor. This is the difference between investing in stock and investing in bonds (which are usury or riba). I agree with this approach to lending because it is the only logical outcome of a pure gold standard. But that is not where we are heading.

"Debt to foreigners is created only when Americans borrow from foreigners."

Wrong. As stated above, we are borrowing by issuing dollars which are only legal tender WITHIN the US.

"But insofar as America practices free trade, there’s a more fundamental reason not to worry. An open economy is not defined by political borders. Therefore, measuring trade between people living in one particular space and people living in other spaces is misleading if these spaces are economically integrated."

Again, the "perpetual dollar reserve" argument. These people forget that even though the dollar is the world's reserve currency, it is only legal tender here. Therefore, things can reverse direction on a dime and then it is our debt!

Thanks FOFOA, Ender and Ivo. You leading commentary has guided me to my own aha moments. I see the difference between gold and silver with regards their commodity vs wealth reserve function much more clearly. I think this the key to the whole Freegold concept and it has taken quite about a year for it to really become clear in my mind. I'm just now catching up to your blog's post. I had spent sometime a few months ago going over the old Gold Trail. As I read more of your posts and others that I get to understand Freegold even more clearly. Thanks again for your commentary, all of you.

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